Workplace pensions were introduced by the government to solve the issue of fewer companies offering pension schemes for life and a lack of regular saving habits among many younger people, or those who moved jobs regularly.
Costs and charges can have a significant impact on how much of a pension pot savers actually end up taking home.
The then pensions minister Steve Webb, now policy director at Royal London, was worried some workplace schemes might introduce high charges which would eat into people’s pension pots.
He proposed a 75 basis point, or 0.75 per cent, cap for those who were auto-enrolled onto a default scheme after a report by the former Office of Fair Trading discovered some employees were being charged as much as 2 per cent or more each year by their employers.
As Neil Johnson, senior partner at True Potential explains: “By 2018, 1.8m businesses in the UK will have to put in place an auto-enrolment pension for their employees.
“The majority of these employers will need assistance over the next 12 months to meet their obligations. The opportunity for advisers lies in the scale of auto-enrolment and providing support to businesses.”
That includes ensuring members of workplace schemes know how to make the 75bps cap worth their while.
Explaining the cap
Andy Beswick, managing director, business solutions at Aviva, explains how the cap works.
“The 75bp charge cap is in relation to pension providers. A member using the default fund of a qualifying auto-enrolment pension cannot be charged more than 75bp by their provider.
“Advisers would have their own arrangement for fees with an employer and their employees if offering advice to individuals,” he adds.
A report published by Defaqto in January 2017, called ‘How to analyse auto-enrolment default funds’, confirms the maximum annual management charge (AMC) chargeable for pension schemes is 0.75 per cent.
But it warns additional charges can be incurred through the pricing of trust funds, for example.
The report points out: “While some providers manufacture their schemes to the 0.75 per cent charge, others operate a more complex structure charging a combination of fees, and advisers should be sure to include all of them in their evaluation process.
“Advisers will find that some schemes do not publicly state their fees, requiring employers to apply before they offer specific rates.”
Figure 1: Main default funds - charges
Source: Defaqto, How to analyse auto-enrolment default funds
According to Nick Dixon, investment director at Aegon, there are now more than nine million individuals saving for retirement through DC pensions.
He confirms value for money is very high on the list of employer demands.
“Furthermore the Department for Work and Pensions price cap, Independent Governance Committees, and FCA’s Asset Management Market study reinforce the drive towards lower fees.
“Aligned to these forces, default funds typically embody active asset allocation and passive stock selection costing as little as 0.05 per cent,” Mr Dixon points out.